Alternate approach to unify CAPM and APT

We utilize the joint elliptical distribution to model a multi-factor return generating process and derive an equilibrium multi-beta capital asset pricing model (CAPM) in which the market portfolio and a set of nonelliptical factors are sufficient to price all financial assets. Most important, it is shown that the market portfolio, while generally nonelliptical, can proxy all elliptical factors and hence: including elliptical factors in addition to the market portfolio in the pricing equation contribute nothing to asset pricing. While the representative investor prices the exposure of aggregate wealth to various nonelliptical systematic risk factors, individual securities are priced in accordance to their contributions to different aspects of the risk of aggregate wealth. The present model collapses to the Sharpe-Lintner CAPM when either the market investor is neutral to nonelliptical risk factors or when all risk factors follow a joint spherical distribution. When residuals cancel out of the market portfolio, the present model collapses to Conner (1984) pricing model.     

Climate change financial risks: Implications for asset pricing and interest rates

In addition to tail macroeconomic events (e.g. wars, financial crises and pandemics), climate change poses a threat to financial stability — with extreme climatic events increasing in frequency and intensity and policy risks putting pressure on asset valuations. We study the effect of a changing climate on asset prices and interest rates through the lens of a dynamic CAPM with rare disasters, time-varying risk and recursive preferences. In our model, a changing climate makes tail events more frequent and less predictable, increasing the premium of climate risk; interestingly, this change may not be fully reflected in the overall market risk premium that includes both components of risk: macroeconomic and environmental. Our results also support the hypothesis of a declining real rate of interest as the planet warms, while the increasing risk of climate policy reduces the participation of brown assets in the market portfolio.     

On the Distributional Conditions for a Consumption-oriented Three Moment CAPM

In this paper, we develop sufficient conditions on probability distributions for a three moment (mean, variance, and skewness) consumption-oriented capital asset pricing model (CAPM) to price correctly a subset of assets. The assumptions that individuals in an allocationally efficient capital market have identical probability beliefs and monotone increasing strictly concave utility functions displaying nonincreasing absolute risk aversion imply an aggregate preference function that exhibits preference for expected return, aversion to variance of return, and preference for positive skewness. For otherwise arbitrary preferences, we show that quadratic characteristic lines are sufficient for a subset of assets to be priced according to a three moment consumption-oriented CAPM.     

Does the Conditional CAPM Work? Evidence from the Istanbul Stock Exchange

Using a sample of common stocks traded on the Istanbul Stock Exchange from February 1997 to April 2008, we test whether the conditional capital asset pricing model (CAPM) accurately prices assets. In our empirical analysis, we closely follow the methodology introduced in Lewellen and Nagel (2006). Our results show that the conditional CAPM fares no better than the static counterpart in pricing assets. Although market betas do vary significantly over time, the intertemporal variation is not large enough to drive average conditional alphas to zero.     

PORTFOLIO CHOICES,CONSUMPTION, AND PRICES IN A MARKET WITH DURABLE ASSETS

Recent research in investments has focused almost exclusively on financial assets such as corporate stocks. Although durable assets constitute an important part of investors' holdings, little effort has been made to explore their role in individuals' investments decisions and on assets pricing. This paper establishes results concerning the role of durable assets in the determination of optimum portfolio choices. The paper explores the effect of consumption considerations related to the service flows generated by durable assets on optimum portfolio considerations and asset prices. The main result is tied to the existence, or lack thereof, of efficient rental markets. In the absence of rental markets (or with restrictions on renting), investors' portfolio choices are not independent of consumption considerations as they are assumed to be in the standard CAPM. Individuals may thus hold different portfolios, and prices reflect the owner's inability to trade consumption flows. Under perfect market assumptions with unrestricted rental markets, optimum portfolio choices are undistinguishable from those implied by the standard CAPM in the sense that they are mean-variance efficient and identical for all individuals. Consumption is adjusted by trading service flows in the rental market. Prices, and the price of risk, however, reflect the existence of durable assets service flows as well as the risks involved in trading these flows in the rental market. In the model, risky rental income is introduced by uncertain rental costs. Equilibrium rental rates, an important part of the return expected from holding durable assets, are determined in the context of the mean-variance framework as a function of return and undiversifiable risk.     

Cryptocurrency returns under empirical asset pricing

This study examines the predictability of cryptocurrency returns based on investors' risk premia. Prior studies that have examined the predictability of cryptocurrencies using various economic risk factors have reported mixed results. Our out-of-sample evidence identifies the existence of a significant return predictability of cryptocurrencies based on the cryptocurrency market risk premium. Consistent with capital asset pricing theory (CAPM), our results show that investors often require higher positive returns before taking on any additional risks, particularly in terms of riskier assets like cryptocurrencies. Tests involving the CAPM model demonstrates that the three largest cryptocurrencies have significant exposures to the proposed market factor with insignificant intercepts, demonstrating that the market factor explains average cryptocurrency returns very well.     

Information and capital asset pricing

Investors in a market frequently update their diverse perceptions of the values of risky assets, thus invalidating the classic capital asset pricing model's (CAPM) assumption of complete agreement among investors. To accommodate information asymmetry and belief updating, we have developed an empirically testable information-adjusted CAPM, which states that the expected excess return of a risky asset/portfolio is solely determined by the information-adjusted beta rather than the market beta. The model is then used to analyze empirical anomalies of the classic CAPM, including a flatter relation between average return and the market beta than the CAPM predicts, a non-zero Jensen's alpha, insignificant explanatory power of the market beta, and size effect.     

Market proxies as factors in linear asset pricing models: Still living with the roll critique

A new model misspecification measure for linear asset pricing models is proposed for the case where misspecification maps to latency of one of the pricing factors; in this case, the market return. This measure is suited both for testing models that include the market return as a pricing factor in a traditional sense (i.e., whether the chosen model does or does not price a collection of risky assets) and ranking those models (i.e., determining which model performs best). The proposed measure is used in pricing portfolios reflecting the size, value, and momentum premia. The conditional CAPM of Jagannathan and Wang (1996) is found to best the performance of both the simple CAPM and the ICAPM of Petkova (2006). Moreover, it is discovered that winner stocks in a momentum portfolio may have higher market betas than loser stocks.     

Liquidity and capital under uncertainty and changing market sentiment: A simple analysis

This study introduces a general approach to investigate resource allocation and asset prices in an economy with uncertainty and shifts in market sentiment. The approach presents a number of key features: first, it proposes a choice-theoretic model that determines the utility that the agents derive from holding assets with different liquidity. Second, it incorporates a variable (endogenously-determined) cost structure of asset liquidation, which reflects the (in)efficiencies of the financial infrastructure and changes in market moods. Third, it also incorporates a model of expectations formation under uncertainty and changing market sentiment. While rich in structure, the approach offers a simple analytical framework to investigate resource allocation decision and asset price dynamics under various sources of uncertainty, and to explore the micro-economics of speculative bubbles and boom–bust sequences. The use of a possible market-specific prudential policy tool is discussed.     

Examination of Conditional Asset Pricing in UK Stock Returns

I examine the empirical performance of various specifications of the capital asset pricing model (CAPM) in UK stock returns, using the stochastic discount framework. When the proxy for the market portfolio includes a proxy for labor income growth in addition to the stock market index, the performance of the CAPM improves. The improvement in performance shows in the magnitude and significance of the pricing errors and in the reduced impact of asset characteristics and other factors in the pricing of assets. There is further improvement when I use conditional versions of the models.     

Measurement Model or Asset Type: Evidence from an Evaluation of the Relevance of Financial Assets

This study focuses on the operation of the Level 1, 2, and 3 measurement uncertainty hierarchy embedded in the SFAS 157 accounting for financial assets. Prior studies conclude the SFAS 157 fair value measurement model and prevailing financial market conditions are causal factors for the lower value relevance of the Level 3 financial assets. The contribution of our paper is to provide evidence on an additional, hitherto undocumented source of measurement uncertainty impacting the relevance of SFAS 157 financial assets to investors: the type of asset appearing in Level 3 financial assets as a result of asset securitizations and SFAS 140 securitization accounting. The paper also presents evidence that suggests the SFAS 166 amendments were unable to fully address informational transparency for financial assets arising from securitizations. The key contribution is evidentiary insights suggesting the prescribed measurement model has a relatively lower impact on measurement uncertainty and relevance of financial assets compared to the effects of the asset type.     

Asset market equilibrium with liquidity risk

This paper derives an equilibrium asset pricing model with endogenous liquidity risk. Liquidity risk is modeled as a stochastic quantity impact on the price from trading, where the size of the impact depends on trade size. Under a strong set of assumptions, we prove that a unique equilibrium liquidity cost process and a unique equilibrium price process exists for our economy. We characterize the market’s state price density, which enables the derivation of the risk-return relation for the stock’s expected return including liquidity risk. We derive a generalized intertemporal CAPM and consumption CAPM for these markets. In contrast to the traditional models without liquidity risk, there is an additional systematic liquidity risk factor which is related to the stock return’s covariation with the market’s stochastic liquidity cost. Traditional transaction costs are a special case of our formulation.     

The Minimal Entropy Martingale Measure (MEMM) for a Markov-Modulated Exponential Lévy Model

This paper deals with the characterization problem of the minimal entropy martingale measure (MEMM) for a Markov-modulated exponential Lévy model. This model is characterized by the presence of a background process modulating the risky asset price movements between different regimes or market environments. This allows to stress the strong dependence of financial assets price with structural changes in the market conditions. Our main results are obtained from the key idea of working conditionally on the modulator-factor process. This reduces the problem to studying the simpler case of processes with independent increments. Our work generalizes some previous works in the literature dealing with either the exponential Lévy case or the exponential-additive case.     

房价预期与城镇居民家庭股市参与——理论探讨与微观经验证据

本文基于中国家庭金融调查数据,通过构建理论模型和实证检验分析了房价预期与家庭股市参与的关系,考察了行为金融偏差在房价预期影响股市参与过程中的作用,并根据背景风险、社会网络和户主特征进行异质性分析。结果表明:(1)房价上涨预期通过降低居民家庭的股票收益率预期和增加住房资产,进而降低居民家庭的股市参与概率和参与程度;(2)“心理账户”以及“有限关注”的存在显著弱化了房价上涨预期对家庭股市参与的负向作用;(3)房价上涨预期对股市参与概率和参与程度的负向作用在收入风险更高、健康状况更差、社会网络水平较低以及受教育程度偏低的家庭中更大。因此,稳定房价预期能够通过提升家庭股市参与,进而从需求角度促进股票市场的健康发展。     

A liquidity-based model for asset price bubbles

We provide a new liquidity-based model for financial asset price bubbles that explains bubble formation and bubble bursting. The martingale approach to modeling price bubbles assumes that the asset's market price process is exogenous and the fundamental price, the expected future cash flows under a martingale measure, is endogenous. In contrast, we define the asset's fundamental price process exogenously and asset price bubbles are endogenously determined by market trading activity. This enables us to generate a model that explains both bubble formation and bubble bursting. In our model, the quantity impact of trading activity on the fundamental price process—liquidity risk—is what generates price bubbles. We study the conditions under which asset price bubbles are consistent with no arbitrage opportunities and we relate our definition of the fundamental price process to the classical definition.     

流动性冲击、货币政策失误与金融危机——对美国金融危机的反思

本文认为:(1)流动性冲击主要通过资产负债表渠道和资产价格渠道来影响金融市场,正是这两种渠道才使得流动性在金融危机爆发及传导的过程中扮演了重要角色。借款人的资产负债表效应导致损失螺旋和保证金螺旋的产生,造成资产的折价销售,推动了资产价格的下跌和进一步的银根紧缩;(2)房地产泡沫的形成与美联储的货币政策失误、金融市场结构变化、新布雷顿森林体系以及投资者的羊群行为等有关,房地产泡沫破灭是美国金融危机的导火索;(3)金融危机爆发后,美联储通过调整中央银行的资产负债表,推出各种形式的金融创新工具,向金融市场注入流动性,有效地降低了金融市场崩溃的概率。论文最后从流动性管理的角度,对美国金融危机进行了反思。     

Beta lives - some statistical perspectives on the capital asset pricing model

This note summarizes some technical issues relevant to the use of the idea of excess return in empirical modelling. We cover the case where the aim is to construct a measure of expected return on an asset and a model of the CAPM type is used. We review some of the problems and show examples where the basic CAPM may be used to develop other results which relate the expected returns on assets both to the expected return on the market and other factors.     

Can An 'Estimation Factor' Help Explain Cross-Sectional Returns?

Abstract:  We show in a theoretical model that the expected excess return on any asset depends on its covariance not only with the market portfolio, but also with changes in the representative agent's estimate. We test our model using GMM and compare it to the CAPM. The results suggest that adding an 'estimation factor' to the CAPM helps explain cross-sectional returns and that, unconditionally, this estimation factor carries a negative risk premium.     

中国金融业资产的规模与效率

通过在金融资产结构与经济增长模型中引入能够综合反映制度变迁的制度变量，证明国家制度变迁对一国金融资产结构与经济增长会起到促进或制约的作用。当制度供给与金融资产结构和经济增长对制度的需求达到均衡时，国家制度安排会优化金融资产结构、促进经济增长，否则便会出现规模与效率的“反比”现象，从而回答了我国金融资产规模与效率之间为什么出现悖论的问题。我国应积极发展非银行金融机构，实现金融体系多元化，对内开放，满足我国经济对多层次、多样化金融的需求，完善金融市场准入制度，优化市场参与主体结构，促进股票市场和银行协调发展。     

中国金融业资产的规模与效率

通过在金融资产结构与经济增长模型中引入能够综合反映制度变迁的制度变量,证明国家制度变迁对一国金融资产结构与经济增长会起到促进或制约的作用.当制度供给与金融资产结构和经济增长对制度的需求达到均衡时,国家制度安排会优化金融资产结构、促进经济增长,否则便会出现规模与效率的"反比"现象,从而回答了我国金融资产规模与效率之间为什么出现悖论的问题.我国应积极发展非银行金融机构,实现金融体系多元化,对内开放,满足我国经济对多层次、多样化金融的需求,完善金融市场准入制度,优化市场参与主体结构,促进股票市场和银行协调发展.